Cash Vs Finance

[Sandeep Shukla]

All,

I am new here and new to commercial real estate investing. I do have a few single-family homes rented out. This will be my first apartment building investment. I could use some advice from experienced investors here what would you do?

I have purchased an apartment building (with 9 units) in an auction deal. Since this is an auction deal I have a hard deadline to close. I have 2 options:

1. Financing: 65% LTV, 7.5% interest rate, 7 years

2. Pay cash and then after 6-9 months do cash out refinance. - in this case, I will have more time to shop around for better loan terms/rates etc. 

Thanks

Sandeep

[Chris Mason]

Quote from @Sandeep Shukla:

All,

I am new here and new to commercial real estate investing. I do have a few single-family homes rented out. This will be my first apartment building investment. I could use some advice from experienced investors here what would you do?

I have purchased an apartment building (with 9 units) in an auction deal. Since this is an auction deal I have a hard deadline to close. I have 2 options:

1. Financing: 65% LTV, 7.5% interest rate, 7 years

2. Pay cash and then after 6-9 months do cash out refinance. - in this case, I will have more time to shop around for better loan terms/rates etc. 

Thanks

Sandeep

 What's the prepayment penalty on option 1? A lot of the apartment loans I do have none, so if that's the case, proceed with option 1 and refinance whenever it suits you. I don't have enough details to opine on the rate/terms being good/bad, but it's not vastly outside the ballpark.

For option 2, why are you assuming you'd have to wait 6-9 months? The "seasoning" thing is for home loans, this isn't a house. :)

[Alecia Loveless]

@Sandeep K Shukla Personally I prefer longer mortgages than 7 years. My past 2 deals have both come with a prepayment penalty so make sure you check on that.

Last year I paid cash for an 8 unit value add that initially wouldn’t qualify for financing. It took about 9 months to stabilize it and then I cash out refinanced it.

If you have enough cash I’d pay cash initially due to the auction deadline. Then shop around for a good mortgage.

I’m using Brandon Turners new lending platform for my latest deal betterliferef they have cash out options and go up to 10 units.

[Sandeep Shukla]

Quote from @Chris Mason:

Quote from @Sandeep Shukla:

All,

I am new here and new to commercial real estate investing. I do have a few single-family homes rented out. This will be my first apartment building investment. I could use some advice from experienced investors here what would you do?

I have purchased an apartment building (with 9 units) in an auction deal. Since this is an auction deal I have a hard deadline to close. I have 2 options:

1. Financing: 65% LTV, 7.5% interest rate, 7 years

2. Pay cash and then after 6-9 months do cash out refinance. - in this case, I will have more time to shop around for better loan terms/rates etc. 

Thanks

Sandeep

 What's the prepayment penalty on option 1? A lot of the apartment loans I do have none, so if that's the case, proceed with option 1 and refinance whenever it suits you. I don't have enough details to opine on the rate/terms being good/bad, but it's not vastly outside the ballpark.

For option 2, why are you assuming you'd have to wait 6-9 months? The "seasoning" thing is for home loans, this isn't a house. :)

 Thanks Chris for the response, appreciate it. 

I am checking on the prepayment penalty.

For the cash out refi, I am thinking it may take 6-9 months to stabilize and then refi. 

[Sandeep Shukla]

Quote from @Alecia Loveless:

@Sandeep K Shukla Personally I prefer longer mortgages than 7 years. My past 2 deals have both come with a prepayment penalty so make sure you check on that.

Last year I paid cash for an 8 unit value add that initially wouldn’t qualify for financing. It took about 9 months to stabilize it and then I cash out refinanced it.

If you have enough cash I’d pay cash initially due to the auction deadline. Then shop around for a good mortgage.

I’m using Brandon Turners new lending platform for my latest deal betterliferef they have cash out options and go up to 10 units.

 Thanks for the response Alecia. 

Just to clarify - for option 1 - loan term is 30 years and rates are fixed for 7. 

Since you have done it, is there anything you would suggest I should keep in mind if I go for 2nd option?

I will check out the Brandon Turners. 

[Gino Barbaro]

@Sandeep Shukla

It really depends upon how much cash you have available. If your debt has no prepayment, you can always refinance WHEN rates come down. Not sure when that is. You are going to have some seasoning on the deal, so I'm not sure 6-9 months will give you enough time to stabilize the asset and have several months of financials.

I would shop the deal with credit unions and community banks.

Sounds like a great deal. Congrats!

Gino

[Nikolas Engel]

I would not even consider option 2. Why? Because the more money you have in the deal the higher your risk. Cash payment is the only way forward if the property does not qualify for a loan until it is stabilized, your situation is different. Since your property apparently qualifies for a loan I would take it - but shop around with different lenders and try to negotiate any prepayment penalty out of the contract. 

I had good experiences with credit unions and community banks as well. 

In the meantime, you can use your cash for another down payment....

[Sandeep Shukla]

Quote from @Nikolas Engel:

I would not even consider option 2. Why? Because the more money you have in the deal the higher your risk. Cash payment is the only way forward if the property does not qualify for a loan until it is stabilized, your situation is different. Since your property apparently qualifies for a loan I would take it - but shop around with different lenders and try to negotiate any prepayment penalty out of the contract. 

I had good experiences with credit unions and community banks as well. 

In the meantime, you can use your cash for another down payment....

 Thank Nikolas for the advice. I agree and we are going with the financing. 

[Erik Estrada]

Quote from @Sandeep Shukla:

All,

I am new here and new to commercial real estate investing. I do have a few single-family homes rented out. This will be my first apartment building investment. I could use some advice from experienced investors here what would you do?

I have purchased an apartment building (with 9 units) in an auction deal. Since this is an auction deal I have a hard deadline to close. I have 2 options:

1. Financing: 65% LTV, 7.5% interest rate, 7 years

2. Pay cash and then after 6-9 months do cash out refinance. - in this case, I will have more time to shop around for better loan terms/rates etc. 

Thanks

Sandeep

 Hey Sandeep, 

Depending on your FICO, DSCR ratio, loan amount size, and property location, you could get a much more favorable rate at a similar LTV and term

[Jay Thomas]

Given the tight deadline, financing at 65% LTV, 7.5% interest, and a 7-year term is the most practical move. There's not much time to hunt for a better loan, and this option helps you save cash and increase your buying power. The rate might not be ideal, but securing the property now is crucial—you can always refinance later for better terms.

[Ross Hayes]

Quote from @Sandeep Shukla:

Quote from @Alecia Loveless:

@Sandeep K Shukla Personally I prefer longer mortgages than 7 years. My past 2 deals have both come with a prepayment penalty so make sure you check on that.

Last year I paid cash for an 8 unit value add that initially wouldn’t qualify for financing. It took about 9 months to stabilize it and then I cash out refinanced it.

If you have enough cash I’d pay cash initially due to the auction deadline. Then shop around for a good mortgage.

I’m using Brandon Turners new lending platform for my latest deal betterliferef they have cash out options and go up to 10 units.

 Thanks for the response Alecia. 

Just to clarify - for option 1 - loan term is 30 years and rates are fixed for 7. 

Since you have done it, is there anything you would suggest I should keep in mind if I go for 2nd option?

I will check out the Brandon Turners. 

Good to clarify that it is a 7 year ARM, amortized over 30 years. That makes a huge difference. Is there a floor and ceiling on how much the interest rate could change after the initial 7 year term?